Question

juhania runs a manufacturing plant for the production of one of its products – the Fizzberry. The budget expects production and sales of 8,000 units per month

. Direct materials standard costs per unit;

•Fizz 0.2kg at £10 per kg

•Berries 4kg at £1.10 per kg

The following data has been collected for April 2020:Actual materials used

;•1,440kg of Fizz at a total cost of £13,824

•24,000kg of berries at a total cost of £21,600•

The output was 7,000 units of Fizzberry There was no work in progress

Calculate the direct materials price and usage variances for April for Fizz.

b) Calculate the direct materials price and usage variances for April for Berries

.c) Calculate the total usage variance for April.

d) Calculate the total direct materials mix and yield variances for April.

e) Analyse the results of your calculations.

d) The current price for berries is currently 80pence per kilo. This change in price has occurred due to a change in import taxes which the business had not been informed about when the original standards were set. Critically evaluate the usefulness of standard costing for control purposes in this situation.

Answer 1

Answer to the question:

Output for the month of april = 7000 units

                      

Material	AQ for 7000 units	AP per unit	SQ for 7000 units	SP per unit	RAQ
Fizz	1440	9.6	1400	10	1211.43
Berries	24000	0.9	28000	1.10	24228.57

Material Price Variance (MPV)= (SP – AP) AQ

Material Usage Variance (MUV) = ((SQ – AQ)SP

a) Direct materials price and usage variances for April for Fizz

MPV = (10-9.6)1440 = 576 Favorable

MUV = (1400-1440)10 = (400) Adverse

b) Direct materials price and usage variances for April for Berries

MPV = (1.10 – 0.90)24000 = 4800 Favorable

MUV = (28000-24000)1.10 = 4400 Favorable

c) Total usage variance for April

Total Usage variance for April = MUV for Fizz + MUV for Berries

                                                         = (400) + 4400

                                                         = 4000

d) Total direct materials mix and yield variances for April

Material Mix Variance = (RAQ- AQ) SP

Fizz = (1211.43 – 1440)10 = (2285.70)

Berries = (24228.57-24000)1.10 = 251.43

Total = (2034.27)

Material Yield Variance = (SQ- RAQ) SP

Fizz = (1400-1211.43)10 = 1885.70

Berries = (28000-24228.57)1.10 = 4148.57

Total = 6034.27

e) Analyse the results of your calculations.

From the above calculation we can analyses derived is as under :

The Price variance of both the products is favourable, whereas usage variance of product fizz is quite adverse and that of berries is very good. Hence both purchase and production department perform there duties efficiently.

But when we consider the Material mix and yield variance then we come to know that there is inefficiency in the production department while mixing the mix of two material because material mix variance is adverse which can result in lower down of benefit of material yield variance.

f) Since current price of the berries is 80 pence per kg where as actual purchase price of the same is 90 pence per kg, hence purchase department purchase the product at higher price then the current market price. Hence actually there is a negative price variance of Berries but the same is reflected in the scenario as positive variance. Hence the above calculation of positive price variance is not to be considered for evaluation of performance of purchase department rather revise variance to be calculated which is equals to (2400)

But since this change in price has occurred due to a change in import taxes which the business had not been informed about when the original standards were set, so budgeted data needs to be revised and variances should be calculated accordingly. And updated variance to be considered in evaluation of the departments performances.